<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission file number 1-14155
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Unigraphics Solutions Inc.
--------------------------
(Exact name of registrant as specified in its charter)
Delaware 75-2728894
---------- ----------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
13736 Riverport Drive, Maryland Heights, Missouri 63043
--------------------------------------------------------
(Address of principal executive offices)
(Zip Code)
(314) 344-5900
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
As of November 8, 2000, there were outstanding 5,054,574 shares of the
registrant's Class A Common Stock, $.01 par value per share, and 31,265,000
shares of the registrant's Class B Common Stock, $.01 par value per share.
================================================================================
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UNIGRAPHICS SOLUTIONS INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Part I -- Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Operations....................................................................... 3
Consolidated Balance Sheets................................................................................. 4
Consolidated Statements of Cash Flows....................................................................... 5
Notes to Consolidated Financial Statements.................................................................. 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 9
Item 3. Quantitative and Qualitative Disclosures About Market Risks................................................. 14
Part II -- Other Information
Item 6. Exhibits and Reports on Form 8-K............................................................................ 15
Signatures................................................................................................................ 16
</TABLE>
2
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
UNIGRAPHICS SOLUTIONS INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue:
Software $ 51,938 $ 47,776 $ 158,753 $ 136,031
Services 66,725 59,990 201,732 169,153
Hardware 3,097 7,911 10,522 26,649
----------- ----------- ----------- -----------
Total revenue 121,760 115,677 371,007 331,833
----------- ----------- ----------- -----------
Cost of revenue:
Software
Amortization 2,671 6,205 7,853 18,484
Royalties, distribution and other 7,128 2,743 23,439 16,204
Services 29,641 27,000 86,347 66,272
Hardware 3,128 6,511 9,274 21,921
----------- ----------- ----------- -----------
Total cost of revenue 42,568 42,459 126,913 122,881
----------- ----------- ----------- -----------
Gross Profit 79,192 73,218 244,094 208,952
----------- ----------- ----------- -----------
Operating expenses:
Selling, general and administrative 42,622 43,267 134,991 120,330
Research and development 18,792 16,727 56,890 50,374
In-process research and development - 2,386 - 2,386
----------- ----------- ----------- -----------
Total operating expenses 61,414 62,380 191,881 173,090
----------- ----------- ----------- -----------
Operating income 17,778 10,838 52,213 35,862
Other income (expense), net (872) 658 (505) 4,157
----------- ----------- ----------- -----------
Income before income taxes 16,906 11,496 51,708 40,019
Provision for income taxes 6,086 4,140 18,615 14,407
----------- ----------- ----------- -----------
Net income $ 10,820 $ 7,356 $ 33,093 $ 25,612
=========== =========== =========== ===========
Earnings per share:
Basic $ 0.30 $ 0.20 $ 0.91 $ 0.71
=========== =========== =========== ===========
Diluted $ 0.30 $ 0.20 $ 0.90 $ 0.70
=========== =========== =========== ===========
Weighted average number of
common shares outstanding:
Basic 36,316,783 36,278,182 36,312,370 36,269,491
=========== =========== =========== ===========
Diluted 36,507,641 36,636,755 36,639,460 36,441,643
=========== =========== =========== ===========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
3
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UNIGRAPHICS SOLUTIONS INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
(UNAUDITED)
<S> <C> <C>
Assets
Current Assets
Cash and cash equivalents $ 16,216 $ 20,696
Accounts receivable, net of allowance for doubtful accounts of $4,408 and $5,312 112,970 125,698
Prepaid expenses 10,048 7,615
Other current assets 5,146 1,566
------------- ------------
Total current assets 144,380 155,575
------------- ------------
Property and equipment, net 29,374 33,110
------------- ------------
Operating and other assets
Goodwill, software and other intangibles, net 64,562 63,038
Deferred income taxes 19,619 22,554
------------- ------------
Total operating and other assets 84,181 85,592
------------- ------------
Total assets $ 257,935 $ 274,277
============= ============
Liabilities and Stockholder' Equity
Current liabilities
Accounts payable and accrued liabilities $ 53,416 $ 59,108
Deferred revenue 19,148 12,886
Income taxes payable 22,856 38,901
------------- ------------
Total current liabilities 95,420 110,895
------------- ------------
Intercompany note 9,480 39,980
Stockholders' equity
Preferred stock, $.01 par value; authorized 20,000,000 shares, none issued -- --
Class A common stock, $.01 par value; 168,735,000 shares authorized; 5,054,574
and 5,034,337 shares issued and outstanding at September 30, 2000 and
December 31, 1999, respectively 50 50
Class B common stock, $.01 par value; 31,265,000 share authorized; 31,265,000
issued and outstanding at September 30, 2000 and December 31, 1999 313 313
Additional paid-in capital 148,913 148,925
Retained earnings (deficit) 8,080 (25,013)
Accumulated other comprehensive income (loss) (4,321) (873)
-------------- -------------
Total stockholders' equity 153,035 123,402
-------------- -------------
Total liabilities and stockholders' equity $ 257,935 $ 274,277
-------------- -------------
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
4
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UNIGRAPHICS SOLUTIONS INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30
---------------------
2000 1999
--------- --------
<S> <C> <C>
Net Cash Provided By Operating Activities $ 42,235 $ 36,257
-------- --------
Cash flows from investing activities
Proceeds from sale of marketable securities -- 5,566
Payments related to acquisitions, net of cash acquired -- (9,498)
Payments for purchases of property and equipment (9,852) (11,215)
Payments for purchases of software and other
intangibles (8,953) (8,149)
-------- --------
Net cash used in investing activities (18,805) (23,296)
-------- --------
Cash flows from financing activities
Borrowings under intercompany credit agreements
and notes 18,818 18,885
Payments on intercompany credit agreements and notes (46,717) (39,349)
Other (12) --
-------- --------
Net cash used in financing activities (27,911) (20,464)
-------- --------
Effect of exchange rate changes on cash and cash
equivalents 1 312
-------- --------
Net decrease in cash and cash equivalents (4,480) (7,191)
Cash and cash equivalents at beginning of period 20,696 20,740
-------- --------
Cash and cash equivalents at end of period $ 16,216 $ 13,549
======== ========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
5
<PAGE>
UNIGRAPHICS SOLUTIONS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Basis of Presentation
The accompanying unaudited consolidated financial statements of Unigraphics
Solutions Inc. ("Company") have been prepared in accordance with generally
accepted accounting principles for interim financial information. In the
opinion of management, all adjustments (consisting of only normal recurring
items) which are necessary for a fair presentation have been included. Certain
reclassifications have been made to the December 31, 1999 financial statements
to be consistent with the presentations as of, and for the period ended,
September 30, 2000. The results of interim periods are not necessarily
indicative of results which may be expected for any other interim period or for
the full year. For further information, refer to the consolidated financial
statements and related notes included in the Company's Annual Report on Form
10-K for the year ended December 31, 1999.
Note 2. Earnings Per Share
The Company presents both basic and diluted earnings per share. Basic
earnings per share of common stock is computed by dividing net income by the
weighted-average number of common shares outstanding during the period. Diluted
earnings per share is calculated in the same manner as basic earnings per share
except that the denominator is increased to include the number of additional
common shares that would have been outstanding, assuming the exercise of all
employee stock options that would have had a dilutive effect on earnings per
share. The following is the calculation for both basic and diluted earnings per
share:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30 September 30
-------------------- ---------------------
2000 1999 2000 1999
-------- --------- --------- ---------
<S> <C> <C> <C> <C>
(in thousands, except per share data)
Net income $ 10,820 $ 7,356 $ 33,093 $ 25,612
======== ======== ======== ========
Weighted-average shares outstanding 36,317 36,278 36,312 36,269
Dilutive effect of employee and director stock options 191 359 327 173
-------- -------- -------- --------
Diluted shares outstanding 36,508 36,637 36,639 36,442
======== ======== ======== ========
Earnings per share:
Basic $ 0.30 $ 0.20 $ 0.91 $ 0.71
======== ======== ======== ========
Diluted $ 0.30 $ 0.20 $ 0.90 $ 0.70
======== ======== ======== ========
</TABLE>
Note 3. Comprehensive Income
Comprehensive income for the three months ended September 30, 2000 and 1999
was $9.8 million and $5.9 million, respectively. Comprehensive income for the
nine months ended September 30, 2000 and 1999 was $29.6 million and $18.9
million, respectively. The difference between comprehensive income and net
income for the three months and the nine months ended September 30, 2000 arose
from foreign currency translation adjustments. For the three months and the nine
months ended September 30, 1999, the difference arose from foreign currency
translation adjustments and unrealized holding gains on certain of the Company's
investments.
6
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Note 4. Segment Information
Industry Segments
The Company's business involves operations principally in one industry
segment: providing mechanical design automation software and related services to
manufacturers for the design, engineering analysis, testing and manufacturing of
mechanical products.
Geographic Segments
The Company aggregates its operations by geographic location for management
reporting purposes. Reportable segments consist of the Americas, Europe, and
Asia Pacific. The Company uses operating income, exclusive of software
amortization costs and in-process research and development costs, to measure
segment profit or loss. The following is a summary of certain financial
information by reportable geographic segment for the three months and nine
months ended September 30, 2000 and 1999 (in thousands):
<TABLE>
<CAPTION>
Three months ended Three months ended
September 30, 2000 September 30, 1999
-------------------- --------------------
Operating Operating
Revenues Income Revenues Income
-------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Americas $ 63,765 $11,504 $ 58,900 $ 9,262
Europe 42,977 7,923 42,225 8,087
Asia Pacific 15,018 1,022 14,552 2,080
-------- -------- -------- -------
Total $121,760 $ 20,449 $115,677 $19,429
======== ======== ======== =======
Nine months ended September 30, Nine months ended December 31,
September 30, 2000 2000 September 30, 1999 1999
-------------------- ------------- -------------------- ------------
Operating Total Operating Total
Revenues Income Assets Revenues Income Assets
-------- --------- ------------- -------- --------- ------------
Americas $200,150 $36,183 $155,227 $171,451 $33,314 $164,411
Europe 126,483 20,768 76,799 122,094 19,984 81,463
Asian Pacific 44,374 3,115 25,909 38,288 3,434 28,403
-------- ------- -------- -------- ------- ---------
Total $371,007 $60,066 $257,935 $331,833 $56,732 $274,277
======== ======= ======== ======== ======= =========
</TABLE>
7
<PAGE>
Reconciliation of operating income for the three and nine months ended
September 30, 2000 and 1999 follows (in thousands):
<TABLE>
<CAPTION>
Three months ended September 30,
--------------------------------
2000 1999
-------------- --------------
<S> <C> <C>
Total operating income for reportable segments $20,449 $ 19,429
Unallocated software amortization costs (2,671) (6,205)
Unallocated in-process R&D costs - (2,386)
-------------- --------------
Operating income $17,778 $ 10,838
============== ==============
</TABLE>
<TABLE>
<CAPTION>
Nine months ended September 30,
--------------------------------
2000 1999
-------------- --------------
<S> <C> <C>
Total operating income for reportable segments $60,066 $ 56,732
Unallocated software amortization costs (7,853) (18,484)
Unallocated in-process R&D costs - (2,386)
-------------- --------------
Operating income $52,213 $ 35,862
============== ==============
</TABLE>
There are no intercompany sales between geographic areas. All sales are
from external customers.
Note 5. Depreciation and Amortization
Property and equipment is stated net of accumulated depreciation of $43.3
million and $37.1 million at September 30, 2000 and December 31, 1999,
respectively. Additionally, software, goodwill and other intangibles are stated
net of accumulated amortization of $35.4 million and $25.3 million at September
30, 2000 and December 31, 1999, respectively. Depreciation and amortization
expense for the three months ended September 30, 2000 and 1999 was $6.0 million
and $9.1 million, respectively. Depreciation and amortization expense for the
nine months ended September 30, 2000 and 1999 was $19.4 million and $26.1
million, respectively.
8
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ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
The Company provides scalable, integrated, enterprise-level mechanical
computer-aided design and collaborative product commerce solutions that are used
for virtual product development principally in the automotive and
transportation, aerospace, consumer products, equipment and machinery, and
electronics industries. For further information, refer to the Company's Annual
Report on Form 10-K for the year ended December 31, 1999.
The Company generates revenue primarily from the licensing of mechanical
computer-aided design ("CAD"), computer-aided manufacturing ("CAM"), computer-
aided engineering ("CAE"), and product data management ("PDM") software
products, and the provision of software consulting, support services and
computer equipment to users of the Company's products (CAD, CAM, CAE and PDM are
collectively referred to as "MCAD"). The Company operates business units in the
United States and in 30 other countries. The Company's software products are
licensed to customers through the Company's direct sales force and by specific
arrangements with certain distributors, value-added resellers and other
marketing representatives.
In 1996 EDS and General Motors ("GM") signed the Unigraphics Software
Corporate License Agreement (the "Initial UCL") for Unigraphics software and
related services. The Initial UCL was a service agreement under the umbrella
EDS/GM Master Service Agreement pursuant to which EDS and its subsidiaries
(including the Company) provided a perpetual license of the Unigraphics software
for up to 10,000 seats, maintenance services and other services. GM and the
Company have negotiated a renewal of the Initial UCL ("Renewal"), which expired
in June 1999. The Renewal is a three year agreement covering software
maintenance services, software development services, contract management
services, and new iMAN software products and services. The Renewal also includes
the provision of mutually agreed to software bundles to GM dedicated product
design contractors and provides for discounts on agreed to UGS software bundles
and other UGS software to other GM suppliers.
The agreed to contract price, excluding any additional GM product and
services charges, GM supplier purchases, and performance penalties, is $139
million. The Renewal also excludes similar products and services being provided
to Delphi Automotive Systems, which was spun off from GM. Approximately $74
million is attributable to software maintenance, $43 million will be paid for
software development, $16 million will be charged for additional iMAN software,
and the remainder will be paid for contract management and other services. The
Renewal also includes penalties for missing service levels, key measurements,
and critical deliverables. Approximately 20% of the $139 million expected
revenues are at-risk because of performance penalties. The inability of the
Company to perform in areas subject to performance penalties and any resulting
assessment of penalties could have a material adverse affect on the Company's
results of operations and financial condition in fiscal year 2000, 2001 and/or
2002.
During the nine months ending September 30, 2000, approximately 13% of the
Company's revenues were attributable to products and services provided to GM.
Effective as of January 1, 1998, the Company entered into a Management
Services Agreement ("MSA") with EDS pursuant to which EDS performs various
management services for the Company, including treasury, risk management, tax
and similar administrative services. The agreement provides for the payment of
fees to EDS for such services, either on a fixed price or usage basis, which
fees are generally designed to approximate EDS' cost of providing the services,
as well as a fixed fee equal to .5% of the Company's annual total revenues up to
a fixed fee cap of $2.5 million. MSA services to be provided and associated
charges are negotiated annually. The Company paid EDS $6.4 million for such
services in 1999, and has begun negotiations with EDS relative to the charges
for services to be provided in 2001. For the nine month period ended September
30, 2000, EDS has invoiced the
9
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Company approximately $3.4 million for services provided during such period.
There can be no assurances that the charges the Company negotiates or pays will,
in the aggregate, be lower than the aggregate of charges the Company might be
able to negotiate with third party suppliers of such services.
Pursuant to the Intercompany Credit Agreement dated January 1, 1998 between
the Company and EDS and similar credit agreements between EDS Finance, PLC and
certain non-U.S. subsidiaries of the Company (collectively, the "Intercompany
Credit Agreement"), the Company is required to borrow from EDS, and EDS is
required to lend to the Company, amounts required by the Company to fund its
daily cash requirements. Subsequent to the closing of the initial public
offering of the Company's Class A Common Stock referred to below, the maximum
amount available to the Company under this facility was $70 million. Effective
as of March 6, 1998, the Company issued to EDS as a dividend an Intercompany
Note in the principal amount of $73 million (the "Intercompany Note"). As of
September 30, 2000 approximately $9.5 million remained payable under the
Intercompany Note. See "Liquidity and Capital Resources" for further
discussion.
On October 23, 2000 the Company completed the acquisition of Engineering
Animation, Inc. ("EAI") pursuant to an offer (as set forth in an Agreement and
Plan of Merger dated September 5, 2000) to acquire all of the outstanding shares
of EAI common stock at a price of $13.75 net per share. The total amount of
Company funds required to consummate the offer and to pay related fees and
expenses is estimated to be $209 million. The Company obtained the funds to
consummate this transaction ($166.2 million to purchase the outstanding shares
of EAI common stock) through advances made by EDS at which time the Intercompany
Credit Agreement borrowing limit was increased to $250 million (see "Liquidity
and Capital Resources" below in this Item 2).
EAI develops and produces Internet-enabled visual process management,
collaboration, communication and analysis software solutions and related
services for extended manufacturing enterprises. Among other EAI products, the
e-VIS.com offerings provide manufacturers and their suppliers and partners with
shared, worldwide access to product and process data. Prior to the acquisition,
the Company licensed certain of EAI's software products and purchased other EAI
services for resale to its customers, primarily as part of the Company's bundled
PDM offerings.
Forward-looking Statements
All statements other than historical statements contained in this Quarterly
Report on Form 10-Q constitute "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995. Without limitation,
these forward-looking statements include statements regarding (1) expected
future declines in hardware revenues, (2) the European currency decline trend,
(3) the sufficiency of liquidity and capital resources over the next twelve
months, (4) concerns regarding performance under the Renewal agreement with GM ,
and (5) any other statements of Company's plans, objectives, expectations or
intentions. Any Form 10-K, Annual Report to Shareholders, Form 10-Q or Form 8-K
of the Company may include these and other forward-looking statements. In
addition, other written or oral statements which constitute forward-looking
statements have been made or may in the future be made by the Company, including
statements regarding future operating performance, short- and long-term revenue
and earnings growth, the value of new contract signings, and MCAD industry
growth rates and the Company's performance relative thereto.
These forward-looking statements rely on a number of assumptions concerning
future events, and are subject to a number of uncertainties and other factors,
many of which are outside the Company's control, that could cause actual results
to differ materially from such statements. These include, but are not limited
to: (1) the Company's ability to quickly and effectively integrate the
operations of EAI into the business of the Company; (2) vigorous competition in
the MCAD industry and the impact of such competition on pricing, revenues and
margins; (3) market acceptance of new Company product or service offerings and
costs associated with the development and marketing of such offerings; (4) the
financial performance of current and future customer contracts; (5) the cost of
attracting and retaining highly skilled personnel; (6) concerns regarding
potential increased costs and the impact on business operations resulting from
implementation of the new enterprise resource planning systems; and the (7)
significant quarterly fluctuations in the Company's operating results caused by,
among other factors, the timing of
10
<PAGE>
orders and shipments. Such factors are described in more detail in the Company's
most recent Annual Report on Form 10-K beginning on page 21.
The Company disclaims any intention or obligation to update or revise any
forward-looking statements whether as a result of new information, future events
or otherwise.
Results of Operations
Revenues. Revenues were $121.8 million during the three months ended
September 30, 2000, an increase of $6.1 million from $115.7 million for the
corresponding period in 1999. Revenues were $371.0 million during the nine
months ended September 30, 2000, an increase of $39.2 million from $331.8
million for the corresponding period in 1999.
Software revenues increased $4.1 million, or 9%, to $51.9 million for the
three month period ended September 30, 2000, from $47.8 million for the
corresponding period in 1999. Software revenues increased $22.8 million, or
17%, to $158.8 million for the nine month period ended September 30, 2000, from
$136.0 million for the corresponding period in 1999. The increase for the three
month period resulted from strong sales performance in the Americas while Europe
and Asia Pacific software sales were relatively flat. The declining value of
the Euro and strong growth in the comparable period in 1999 impacted Europe's
growth for the three months ended September 30, 2000 (see "Impact of Changes in
Exchange Rates" below). The increase for the nine month period resulted from
strong sales performance in the Americas and Asia Pacific.
Services revenues increased $6.7 million, or 11%, to $66.7 million for the
three month period ended September 30, 2000, from $60.0 million for the
corresponding period in 1999. Services revenues increased $32.5 million, or 19%,
to $201.7 million for the nine month period ended September 30, 2000, from
$169.2 million for the corresponding period in 1999. The increase resulted from
software maintenance growth in all geographic areas along with professional
services growth in the Americas and Europe. Software maintenance revenue growth
coincides with increases in software revenue. The growth in professional
services revenue has resulted from greater demand for special software
development services.
As planned, hardware revenues decreased $4.8 million, or 61%, to $3.1
million for the three month period ended September 30, 2000, from $7.9 million
for the corresponding period in 1999. Hardware revenues decreased $16.1 million,
or 61%, to $10.5 million for the nine month period ended September 30, 2000,
from $26.6 million for the corresponding period in 1999. All geographic areas
experienced decreases for both the three month and nine month periods. The
Company plan is for hardware revenues to become a smaller portion of its
business.
Revenues from international operations represented 51% and 53% of total
revenues for the three months ended September 30, 2000 and 1999, respectively.
Revenues from international operations represented 49% and 52% of total revenues
for the nine months ended September 30, 2000 and 1999, respectively.
Gross Profit. Gross profit was $79.2 million during the three months ended
September 30, 2000, an increase of $6.0 million from $73.2 million for the
corresponding period in 1999. Gross profit was $244.1 million during the nine
months ended September 30, 2000, an increase of $35.1 million from $209.0
million for the corresponding period in 1999. Gross profit margin was 65% for
the three months ended September 30, 2000 and 63% for the three months ended
September 30, 1999. Gross profit margin was 66% and 63% for the nine months
ended September 30, 2000 and 1999, respectively.
Gross profit on software revenues increased $3.3 million, or 9%, to $42.1
million for the three month period ended September 30, 2000, from $38.8 million
for the corresponding period in 1999. Gross profit on software revenues
increased $26.2 million, or 26%, to $127.5 million for the nine month period
ended September 30, 2000, from $101.3 million for the corresponding period in
1999. The increases resulted primarily from strong revenue growth and lower
amortization costs which offset an increase in software vendor royalties during
these periods.
11
<PAGE>
Gross profit on services revenues increased $4.1 million, or 12%, to $37.1
million for the three month period ended September 30, 2000, from $33.0 million
for the corresponding period in 1999. Gross profit on services revenues
increased $12.5 million, or 12%, to $115.4 million for the nine month period
ended September 30, 2000, from $102.9 million for the corresponding period in
1999. The services gross profit increase resulted from an increased sale of
software maintenance services and professional services.
Gross profit on hardware revenues decreased $1.4 million to breakeven for
the three month period ended September 30, 2000, from $1.4 million for the
corresponding period in 1999. Gross profit on hardware revenues decreased $3.5
million, or 74%, to $1.2 million for the nine month period ended September 30,
2000, from $4.7 million for the corresponding period in 1999. Hardware gross
profit declined because of the Company's reduced emphasis on hardware selling
resulting in lower hardware sales volumes.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $42.6 million during the three months ended
September 30, 2000, a decrease of $0.7 million from $43.3 million for the
corresponding period in 1999. Selling, general and administrative expenses were
$135.0 million during the nine months ended September 30, 2000, an increase of
$14.7 million from $120.3 million for the corresponding period in 1999. Selling,
general and administrative expenses represented 35% and 37% of total revenues
for the three months ended September 30, 2000 and 1999, respectively, and 36% of
total revenues for the nine months ended September 30, 2000 and 1999. Selling
costs comprise salesperson salaries, commissions, benefits, travel, sales office
occupancy and other related costs. The higher selling expenses resulted from
increases in commissions and bonuses because of continued strong sales growth
over 1999 and increased staffing to support possible higher revenue growth.
General and administrative costs as a percentage of revenues declined for the
three months ending September 30, 2000 and were constant year-over-year for the
nine months ending September 30, 2000.
Research and Development Costs. Research and development costs were $18.8
million for the three months ended September 30, 2000, an increase of $2.1
million from $16.7 for the corresponding period in 1999. Research and
development costs were $56.9 million and $50.4 million for the nine months ended
September 30, 2000 and 1999, respectively. Research and development costs as a
percentage of total revenues were 15% and 14% for the three months ended
September 30, 2000 and 1999, respectively, and 15% for the nine months ended
September 30, 2000 and 1999. Increases in research and development costs have
resulted from new initiatives in the iMAN and Collaborative Product Commerce
("CPC") areas.
Operating Income. Operating income was $17.8 million and $10.8 million for
the three months ended September 30, 2000 and 1999, respectively. Operating
income was $52.2 million and $35.9 million for the nine months ended September
30, 2000 and 1999, respectively.
Other Income (Expense), Net. Other income (expense), net was ($0.9) million
and $0.7 million for the three months ended September 30, 2000 and 1999,
respectively. Other income (expense), net was ($0.5) million and $4.2 million
for the nine months ended September 30, 2000 and 1999, respectively. The
decrease for the three months and nine months ended September 30, 1999 in other
income (expense), net resulted from differences in the amounts of gain realized
from the sale of marketable equity securities. These securities were obtained
through the exercise of warrants in the quarter ended March 31, 1998. The
warrants were received in exchange for reduced royalty fees from a private
software company that was acquired by a public company in 1997. All such
securities had been sold as of December 31, 1999.
Provision for Income Taxes. The provision for income taxes was $6.1 million
and $4.1 million for the three months ended September 30, 2000 and 1999,
respectively. The provision for income taxes was $18.6 million and $14.4 million
for the nine months ended September 30, 2000 and 1999, respectively. The
Company's effective tax rate was 36.0% for the three months ended September 30,
2000 and 1999, and the nine months ended September 30, 2000 and 1999.
Net Income. Net income for the three months ended September 30, 2000, was
$10.8 million compared to $7.4 million for the corresponding period in 1999.
Net income for the nine months ended September 30, 2000, was
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$33.1 million and $25.6 million for the corresponding period in 1999. Basic and
diluted earnings per share of common stock were $0.30 and $0.20, respectively,
for the three months ended September 30, 2000 and 1999. Basic and diluted
earnings per share of common stock were $0.91 and $0.90, respectively, for the
nine months ended September 30, 2000. Basic and diluted earnings per share of
common stock were $0.71 and $0.70, respectively, for the nine months ended
September 30, 1999.
Recent Accounting Pronouncements. Statement of Financial Accounting
Standards (SFAS) 133, Accounting for Derivative Instruments and Hedging
Activities, which was issued in June 1998, establishes accounting and reporting
standards for derivative instruments and hedging activities. Under SFAS 133,
derivatives are recognized on the balance sheet at fair value as an asset or
liability. Changes in the fair value of derivatives are reported as a component
of other comprehensive income or recognized as earnings through the income
statement depending on the nature of the instrument. In June 1999, the FASB
issued SFAS 137 - Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB Statement No. 133, an Amendment of FASB
Statement No. 133, which defers the effective date of SFAS 133 from fiscal years
beginning after June 15, 1999 to fiscal years beginning after June 15, 2000.
Initial application should be as of the beginning of an entity's fiscal quarter.
On that date, hedging relationships must be designated and documented pursuant
to the provisions of SFAS 133, as amended. Earlier application of all of the
provisions is encouraged, but is permitted only as of the beginning of any
fiscal quarter that begins after the issuance date of SFAS 133, as amended.
Additionally, SFAS 133, as amended, should not be applied retroactively to
financial statements of prior periods. The Company is currently evaluating the
requirements of SFAS 133, as amended, to determine its potential impact on the
consolidated financial statements.
In March 2000, the FASB issued FASB Interpretation No. 44, Accounting for
Certain Transactions Involving Stock Compensation: an Interpretation of APB
Opinion No. 25. This interpretation clarifies the application of APB Opinion
No. 25, Accounting for Stock Issued to Employees, and is effective July 1, 2000.
We do not expect our adoption of this interpretation to have a material effect
on our results of operations or financial position.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements.
This bulletin summarizes certain of the staff's views in applying generally
accepted accounting principles to revenue recognition in financial statements.
In June 2000, the SEC issued SAB No. 101B that delayed the implementation date
of SAB No. 101 until the fourth fiscal quarter of fiscal years beginning after
December 15, 1999, although early adoption is allowed. We do not expect our
adoption of the provisions of this statement effective October 1, 2000, to have
a material effect on our results of operations or financial position.
Liquidity and Capital Resources
The Company's central cash management function is performed by EDS. The
Company has an Intercompany Credit Agreement with EDS under which there was no
amount outstanding at September 30, 2000. The maximum amount that the Company
may borrow at any time from EDS under the Intercompany Credit Agreement
(including certain other credit agreements between EDS Finance PLC, a wholly-
owned subsidiary of EDS, and certain non-U.S. subsidiaries of the Company)
currently is $250 million. In conjunction with the Company's commencement of
the offer to purchase all of the outstanding common shares of EAI, on September
1, 2000 the Intercompany Credit Agreement borrowing limit was increased to $250
million from $70 million. Such limit will be reduced, up to a maximum reduction
of $180 million, dollar-for-dollar, by the amount of any term loan facility
(including any term loan facility with EDS or its affiliates) which the Company
may obtain to refinance amounts outstanding thereunder.
Amounts outstanding under the Intercompany Credit Agreement bear interest,
payable quarterly at a rate equal to one-month LIBOR plus 0.5%. The
Intercompany Credit Agreement restricts the Company from obtaining financing
from any party other than EDS without written consent from EDS, unless EDS fails
to provide funding available to the Company under the Intercompany Credit
Agreement. The Intercompany Credit Agreement terminates on December 31, 2002,
unless terminated earlier at the election of one of the parties upon occurrence
of
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certain events, and requires that the Company lend to EDS all excess cash of the
Company at a rate of one-month LIBID minus 0.5%.
The Company also has outstanding an Intercompany Note in the principal
amount of approximately $9.5 million payable to EDS on March 6, 2001. The
Intercompany Note bears interest, payable semiannually, at a rate equal to one-
month LIBID minus 0.5%.
The Company's net cash provided by operations for the nine months ended
September 30, 2000 increased $5.9 million to $42.2 million from $36.3 million in
the comparable period in the prior year. The increase resulted from higher net
income and a decrease in accounts receivable. The Company's net cash used in
investing activities for the nine months ended September 30, 2000 decreased $4.5
million to $18.8 million from $23.3 million in the same prior year period. This
decrease occurred because of payments related to acquisitions and sales of
securities in the prior year. Net cash used in financing activities increased
$7.4 million to $27.9 million for the nine months ended September 30, 2000 from
$20.5 million in the nine months ended September 30, 1999. This reflects higher
net repayments on cash borrowings from EDS. The Company believes currently
available sources of liquidity, including the Intercompany Credit Agreement and
cash generated from operations, should be sufficient for its operations for at
least the next twelve months.
Impact of Changes in Exchange Rates
The Company's results of operations can be affected by changes in exchange
rates. Revenue received and expenses paid in currencies other than the U.S.
dollar are translated into U.S. dollars for financial reporting purposes based
on the average exchange rate for the period. The current decline in European
currencies has had a negative effect on revenues and operating performance to
date; and a continuing decline in European currencies versus the U.S. dollar
could have a material, negative effect on the Company's revenues and operating
performance for calendar year 2000. During the nine months ended September
30, 2000, international revenue represented 49% of total Company revenue. The
Company's most significant international operations are located in Germany and
the United Kingdom, which comprised 27% and 11%, respectively, of total
international revenue for the nine months ended September 30, 2000. Foreign
revenue and costs are generally received and paid in the local currency.
Historically, foreign currency transaction gains (losses) have not had a
material effect on the Company's operations.
Inflation
Historically, inflation has not had a material effect on the Company's
results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not enter into financial instrument transactions for
trading purposes. Additional information about the Company's risk related to
changes in foreign exchange rates is contained in Item 2., "Management's
Discussion and Analysis of Financial Condition and Results of Operations" under
"Impact of Changes in Exchange Rates."
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description
------ -----------
2.1 Agreement and Plan of Merger, dated as of September 5, 2000,
by and among Unigraphics Solutions Inc., UGS Acquisition
Corporation and Engineering Animation, Inc., incorporated
herein by reference to Exhibit (d) (1) to the Schedule TO
(File No. 005-48517) filed by Unigraphics Solutions Inc. and
UGS Acquisition Corporation on September 13, 2000.
3.1 Restated Certificate of Incorporation of Unigraphics
Solutions Inc., incorporated herein by reference to Exhibit
3.1 to Amendment No. 1 to the Registration Statement on Form
S-1 of the Company (File No. 333-48261).
3.2 Amended and Restated Bylaws of Unigraphics Solutions Inc., as
amended, incorporated herein by reference to Exhibit 3.2 to
Amendment No. 1 to the Registration Statement on Form S-1 of
the Company (File No. 333-48261).
10.1 Personal Services Agreement, effective July 15, 2000, between
Unigraphics Solutions Inc. and Anthony J. Affuso, replacing
the Personal Services Agreement dated January 20, 2000
between Unigraphics Solutions Inc. and Anthony J. Affuso,
incorporated herein by reference to Exhibit 10.18 to Form 10-
K of Company filed on March 29, 2000 (File No. 001-14155).
10.2 Personal Services Agreement, effective July 15, 2000, between
Unigraphics Solutions Inc. and Charles C. Grindstaff.
10.3 Amendment Two to the First Amended Unigraphics Solutions Inc.
401(k) Plan.
27 Financial Data Schedule (for SEC information only)
The registrant undertakes to furnish supplementally any omitted
schedule to the Securities and Exchange Commission upon request.
(b) Reports on Form 8-K
None.
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UNIGRAPHICS SOLUTIONS INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized and in his capacity as Chief Financial
Officer.
UNIGRAPHICS SOLUTIONS INC.
---------------------------------
(Registrant)
By /s/ Douglas E. Barnett
-----------------------------------
Douglas E. Barnett, Vice President,
Date: November 9, 2000 Chief Financial Officer and Treasurer
16
